ServiceNow Founder and Investor Offer Lessons in Startup Growth

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Barber, who is a longtime ServiceNow board member, said Luddy was calling him almost daily, saying, “I just can’t do it. I want out.”

Barber said he told Luddy, “You’re probably going to have the hardest 90 to 120 days of your life.” The startup founders who are good at innovation often don’t succeed as CEOs when companies move to the growth stage, and they often don’t last in a subordinate role. But he encouraged Luddy to stick it out. “In JMI’s experience, we’ve never been able to keep an innovator as long as Fred.”

In the end, though, Luddy agreed that moving aside for Slootman was the right thing to do. As he put it, “My skillset is to think about where the market might be going. Frank’s skill is in performance and execution, and in building large, highly functional organizations.”

Barber added, “We were growing by 100 percent year-over-year, and Frank said we weren’t growing fast enough. Frank brought in an HR executive from Data Domain, and together they built a hiring engine that enabled them to grow to scale fast.”

Luddy added that while he was CEO, “Nothing we were doing was being questioned,” at least partly because revenue growth was so strong at the time. “But we probably would have peaked out at a couple hundred million a year,” Luddy said.

Luddy and Barber also disclosed that ServiceNow received numerous buyout offers before Slootman took over.

“We got a number of unsolicited term sheets to sell the company,” Luddy said. “They went from the tens of millions to the hundreds of millions, and I was ready to sell every time.” However, Barber persuaded him against selling each time. In retrospect, Luddy said, selling ServiceNow “would have been a $10 billion mistake.”

How—or why—did ServiceNow resist the buyout offers?

Barber said one reason was that ServiceNow was extremely “capital efficient”—stretching JMI’s $9.3 million investment over a roughly six-year period. Luddy said that with just a few senior developers and a small number of experienced sales people, ServiceNow landed business with Qualcomm, Deutschebank, UBS, and Johnson & Johnson. The business was cash flow positive within a few years after Luddy founded the company.

As Barber put it, “Fred got the company to a $100 million run rate with 100 employees.”

With each buyout offer, Barber said he believed that ServiceNow’s valuation was substantially higher than whatever the offer was—and each time, ServiceNow’s investors, board members, and senior executives eventually agreed to reject the offer.

There were no internal conflicts or insider pressure to sell, Barber explained, because all the stakeholders’ interests were aligned. In other words, everyone could afford to hold out for a better offer because they had profitably sold some of their shares through the private equity deal.

When ServiceNow made its IPO debut in mid-2012, the company’s shares soared by 37 percent on the first day of trading (climbing from $18 to $24.60 a share), which yielded a market valuation of nearly $2.2 billion. Today, ServiceNow shares are trading around $76 a share, giving the company a valuation of more than $11.7 billion.

In 2013, Slootman moved ServiceNow’s headquarters to Santa Clara, CA, which increased the company’s visibility among industry analysts and tech journalists. That has been good for the company, Barber said, even though it means that San Diego has lost some unicorn bragging rights.

Luddy said he expected the move to Silicon Valley also would yield a bonanza of talented software developers. But in this respect, he said he’s been disappointed.

“It’s a very mercenary environment,” Luddy said. “In Silicon Valley, people will spend an inordinate amount of time telling you how brilliant they are—so much so, that they don’t spend any time doing work,” Luddy said. “The talent [in Silicon Valley] is not nearly as exceptional as it thinks it is.”

In general, it also has become much harder to persuade employees to move to another city for a job offer, Barber said. As a result, ServiceNow has established a sizable software development group in San Diego, as well as in Seattle, Waltham, MA, and other U.S. cities, and overseas in the Netherlands, Israel, Singapore, and elsewhere around the world.

Luddy agreed, saying, “I’ve lived in five different countries, and I don’t see any reason why you can’t build software companies anywhere in the world.”